Good afternoon, and thank you for joining Garanti BBVA's third quarter 2026 financial results webcast. Today, representing Garanti BBVA, we are joined by our CEO, Mr. Mahmut Akten, our CFO, Mr. Atıl Özus, and our Head of Investor Relations, Ms. Ceyda Akınç. Following management's presentation, we will open the floor for questions. You may either use the raise hand function or submit your questions through the Q&A box. Without further ado, I will hand over to management.
Our financial results on October 28, I am sure most of you have already had opportunity to go through the numbers. Therefore, I will keep the presentation in brief, focusing on key highlights and full-year outlook, leaving more room for your questions. Let's start with macro highlights. We maintain our year-end GDP growth forecast at 3% with downside risk due to high energy prices and weaker-than-expected economic activity. In terms of inflation, we maintain our year-end inflation forecast at 30%, with energy prices remaining the main upside risk. With inflation likely to stay sticky around 30% until late first quarter of 2027, and upside risk persisting, there could be limited room for monetary easing in the near term. In terms of current account deficit, current account balance has been more resilient than expected. We estimate that the deficit may widen only $10 billion-$15 billion in the fourth quarter.
This reflects weaker-than-expected domestic demand, resilient tourism revenues, and increasing share of renewables in electricity production. Fiscal discipline continues to support macroeconomic stabilization. Improved income tax collection and disciplined spending have supported the budget balance.
Now, moving into our financials, I will start with the headline figure. In the first nine months of the year, we generated TRY 98 billion in net income, up by 16% year-on-year, while recording 27.5% return on equity. A strong recovery in net interest income, together with sustained fee momentum, more than offset higher provisioning cost. Our sector-leading core banking revenues provide a solid foundation for sustainable earnings growth. A key driver in the third quarter was a strong recovery in net interest income, which increased by 23% quarter-on-quarter, supported by improving funding conditions and our disciplined loan pricing.
Fee income also maintained its solid momentum, growing by 5% quarterly and 36% year-on-year. Trading income presents 3% of our gross income on a cumulative basis and is inherently more sensitive to market volatility. Our earnings profile continues to be driven by NII and fee income. The key driver of our performance remains our lending-driven asset mix. Our total assets reached TRY 5.6 trillion, and loans contribution increased further to 56%. In TL securities, we continued to selectively increase our floating rate notes. Moving into slide nine for further insights on loan portfolio, we maintained our growth pace in TL loans and continued to gain market share across all major lending segments. Business banking loans were the frontrunner in the third quarter, while we strengthened our position in consumer loans and credit cards.
As our loan mix continues to evolve towards consumer lending and credit cards, we continue to proactively identify and classify these exposures. Share of Stage 2 increased to 14% from 12%. Here, I would like to highlight that 90% of this increase was coming from the SICR, and SICR portfolio reflects our prudent approach, as 85% of this portfolio is non-delinquent. The higher share of early-stage SICR exposures also lowered our Stage 2 coverage ratio. In terms of restructured loans, it declined in the second quarter and third quarter, following the migration of previously restructured loans into Stage 3, with the end of the related regulation. In terms of NPL, the trend observed in Stage 2 was also evident in NPL inflows, with around 70% of new NPL inflows was coming from consumer loans and credit cards.
In addition, the end of the restructuring regulation resulted in a temporary increase in NPL inflows in the second and third quarter. In terms of cost of risk, our cost of risk increased on a quarterly basis, reflecting increased NPL inflows in consumer loans and lower-than-expected provision reversal. The higher-for-longer interest rate environment is prolonging the normalization of our portfolio's asset quality. As a result, we expect cost of risk to finish slightly above our initial guidance. On the funding side, our long-standing customer relationships continue to support our broad deposit base. Total customer deposits reached TRY 3.6 trillion , constitutes 65% of total assets. Quarterly decline in TL time deposits reflect a normalization following the strong growth recorded in the second quarter. Underlying TL deposit growth remains strong on an average basis. Foreign currency deposit growth driven by tactical funding cost and liquidity optimization.
This reflects our dynamic approach to the balance sheet and funding cost management as we continuously optimize our funding mix depending on market conditions, as it was evident in our net interest margin progress. With TL deposit costs currently trending down, foreign currency deposits have already returned to the more normalized levels. Moving on to external funding, we also further diversified base through subordinated debt issuance and DPR financing transaction completed in October. Our total external debt currently stands at around $10 billion, of which $4.3 billion is short-term. Against this, we maintain a comfortable foreign currency liquidity buffer of $8.6 billion. In the third quarter, net interest margin recovered strongly, supported by widening core spreads, as you can see on the right-hand side.
We benefited from lower deposit costs as we swiftly passed through the CBRT's late August easing to deposit pricing, alongside proactive funding mix optimization. At the same time, loan yields continued to improve, benefiting from repricing of loan portfolio ahead of normalization in CBRT's funding conditions. On the CPI linker side, we revised our inflation assumption from 27% to 29%, resulting in 10 basis points positive impact on net interest margin. Overall, our cumulative net interest margin reached 6%, putting us in a strong position to deliver our initial full-year guidance. Our fee performance also continued to stand out. Our fee base was up by 26% year-over-year. Although payment system fees continued to be the key driver, contribution from money transfer, insurance, and asset management fees further gained momentum.
In the first nine months, our OpEx growth is faring better than initially expected, particularly on the non-HR side, reflecting our continued focus on cost discipline. We continue to have the lowest cost-income ratio. In terms of capital, as always, we remained focused on capital generative growth, which is clearly reflected in our sector-leading capital ratios. Supported by strong earnings generation, we slightly increased our common equity tier 1 to 12% and capital adequacy ratio to 16.1%. The foreign currency sensitivity on capital ratios remain limited. We have a strong TRY 169 billion excess capital, providing ample capacity to absorb market volatility while supporting future growth. With that, let me walk you through our operating plan guidance and our current outlook. Despite the revisions in the macro assumptions, we will manage to deliver better than what we promised in the revenue items.
Lending growth is progressing in line with our guidance. In net cost of risk, the higher for longer interest rate environment is prolonging the normalization. As a result, we expect cost of risk to finish slightly above our initial guidance. Our margin outlook has improved since the second quarter. We are now well-positioned to deliver our initial net interest margin with potential upside depending on interest rate developments. Our fee growth performs in line with the expectations. Our OpEx is also performing better than initially expected, particularly on the non-HR side. We therefore expect OpEx growth to remain below our initially guided range. All in, stronger margins, sustained fee momentum, and cost efficiency continue to help offset asset quality headwinds. However, with inflation now expected at 30% compared to our initial assumption of 25%, we no longer expect to meet our real ROAE target.
We remain well-positioned to deliver our nominal ROAE guidance. This suggests that current ROAE levels is expected to be sustained, which represents the by far the best level among tier 1 banks. This concludes my presentation. Now we can take your questions.
Welcome to the Q&A session. As a reminder, you may ask your questions either by raising your hand or by using the Q&A box. When your name is called, please unmute yourself and proceed with your question. Let's begin with our first question from David Taranto. Hi, David. Please go ahead.
Good afternoon. Thanks for the presentation. I have two questions, please. Firstly, you gained market share in Turkish lira lending, while you are also seeing higher retail NPL formation and cost of risk. How are you thinking about the trade-off between further market share gains and protecting risk-adjusted returns, particularly on the business and SME side? Has your lending appetite changed at all since the end of thirrd quarter? Secondly, cost of risk is running somewhat above your original expectations. Do you think we have now seen the peak in terms of cost of risk? Given your relatively cautious expectations for the rates in the near term, how should we think about the pace of asset quality normalization into next year? Thank you.
Thank you. Two excellent questions. I would have asked similar questions, just looking at market share and cost of risk. Yes, you are right. We gain market share at every front pretty much, and our cost of risk is rising. Both of them a bit expected, given our strategy in the previous meetings we discussed briefly in some of our calls and questions. As you can imagine, especially given the caps and non-cap items in the past, the credit card growth as well as retail overdraft and GPL growth has been significant. Now, credit card growth has come down, but just not because of it is capped. It is just not capped, but it is just that we have not observed as much as what we have observed several years ago during the COVID and later.
The Turkish lira portion of the balance sheet, the retail portion is relatively high versus what we have used to have in the past. Especially wholesale, I cannot say the same thing for SME, but SME comes with a higher margin regardless. The wholesale banking has always have a lower cost of risk. Actually, even the current numbers, if you look at wholesale versus micro SMEs, but especially credit card GPL and retail loans GPL in general, we see 1x- 2.5 x higher cost of risk in those items. Then you have regulatory risk as well in credit card, and overdraft is driven by regulation. We like to grow in wholesale banking to balance our overall interest rate risk as well as cost of risk in general. There is a shift in Turkish lira lending in our strategy.
We continue to grow in business lending as much as we can. Definitely, we have, Atıl is next to me and he will comment, but we have a very much discipline in terms of risk-adjusted returns, and we have a threshold, and it has to be over threshold. It also explain part of our high NIM versus the competition as well. We have always had a very good NIM in general, but this further helps our higher NIM. On its own, it pays for the cost of risk in SME and retail. Again, if you just look at the Turkish lira, it has a higher portion of retail versus the past. Now, it is like two-thirds of the portfolio is retail and retail in general versus SME and wholesale. Wholesale corporate is not growing, for instance, at these interest rates. This is strategy in general.
Before moving to the second question, you were going to comment.
No, I think, I mean, NIM compensates the cost of risk, but also the other revenues, including commissions and the other customer revenue, more than compensate some cost of risk increase in retail portfolio.
Yeah. If you remember, related to the second question, we expected a normalization on cost of risk, partially because of interest rate, higher interest rate risk. If you go back to 2018, 2017, 2019, the interest rate hiked a bit, the cost of risk was higher and NPL ratios were higher than during the COVID time. In 2021 and 2022, 2023, the growth in overall Turkish lira growth was like 36%, 59%, 60%, and retail portfolio was like more than 120% in credit card. Now they are down to lower growth. Like this year, it's around 30% parallel to inflation. Your denominator is not growing as much, but more importantly, interest rate is higher, as you point out, and we expect high interest rate to continue. We expect a normalization when we look at the last 10-plus years, and that's happening right now.
We are not that much concerned about it. We expect another 10% increase or less in cost of risk going forward, going to the next year, as we are going through the budgeting process. We are not at peak, but we are near the peak, I can tell you that. We definitely, regardless of the pricing and IRR, we know that is always internally and externally. Cost of risk and NPL is one of the most watched KPIs. Even if we make money, at the end, we are actually cutting a bit in certain areas, in certain segments, but still being prudent and still trying to create value in our approach to customer loan distribution. Hopefully it explains.
Yes. Thank you very much. Thank you.
Thank you, David.
We have one written question. Where do you see key asset quality pressure? Any color on segments, et cetera? We appreciate it.
Yeah. Again, similarly, I think in two segments we see more pressure. One is on credit card in general, overdraft, this type of rotating credit in retail segment. The reason is, in Turkey, the minimums that customer needs to pay is relatively high, even though you don't have much debt. If you look at the household debt, it's relatively low versus GDP at only 10%. But you have to minimum pay 40% for most of our customers. There are a small segment with 20%, very low end of the customers. So, the minimum payments is relatively high. Then we have done with regulator permission and incentive that we have done two restructuring, longer duration. We took the loans and restructured. That helped. But for last three, four months, there hasn't been any further restructuring opportunities to extend the duration, to reduce the payments.
I expect there will be another round potentially, especially between now and the end of January, where the salaries are adjusted. There might be a bit of pressure on credit card GPL to a less extent, but overdraft, some of the rotating credits. The second part is related to SMEs. We see more activities, more fragments, it is more challenging, and it is more automated regardless as a process. In any high interest rate environment, or any pressure always goes down the value chain to SMEs. There has been extra movements in that segment in terms of NPL ratios and cost of risk. This is very observable. I do not think we will have a significant pressure that coming from the recent fund crisis where some of the retail customers and SME customers lost some money in the funds, but we haven't observed anything there.
If anything, that might be additional pressure. Those are the segments. For the larger corporates and larger commercials, we do not see that much of an issue. They had already very low NPL ratios and cost of risk. These three, because of also the growth in terms of lower growth and lower demand on credit card as well, denominator, there might be some more pressure. As I said in the previous questions where David asked, we are not at peak, but we are near peak. The only reason I said we are near peak, the next three months will be still a bit of challenging from SME perspective as well as from retail customer perspective. That is your first question.
Thank you. We have another written question. Your guidance on operating costs was very conservative at the beginning of the year. Given lower-than-expected OpEx growth in the first nine months, even in an environment with higher-than-expected inflation, where do you see the efficiencies? Do you think that such efficiencies are sustainable?
Not significant, but material still important in the use of AI in terms of operating expenses and especially outsource costs in FTEs. We have seen some of those. Also just a bit more disciplined approach, especially our new CFO is harsher than myself, Atıl. Can you comment on it as well?
Yeah. Thank you. Yes, I mean, we are doing better than our cost guidance. I mean, we will be continuing. The most important thing is efficiency. I mean, not looking at the cost by itself, but what kind of profit we also generate with this cost. We are very keen on spending the money with the right projects, right initiatives. This will continue. We try to be continue to disciplined and delivering the efficiency. This is the key.
I said two. One is optimization, sometimes using AI on some of the spendings we use and optimize. We need to see the return in terms of customer acquisition or product sales. Second one, to every spending, we approach with a discipline of what is the return? It might be regulatory, then I have no question. It might be environmental, we have no questions. But if it is a business investment in technology or in any area, what is the return for us? We go through that. Yes, typically we are a bit more conservative in any of our expenses guidance, but this year we really focus on improving further our efficiency. As in the past as well, some of these calls we mentioned that we have been spending a lot of time with AI.
Before AI, we have started the journey of using a lot of modeling to optimize our cost and more important customer acquisition and marketing and so forth. We feel more pressure on being able to show that in our OpEx as well, and I think we have done it to an extent. There will be more rooms going forward as well.
Thank you.
Our next written question, "Could you give us more color on any RWA optimization initiatives you have taken, and what impact do you expect this to generate over time?
Yes, thank you. RWA optimization is a continuous process depending on what kind of opportunities we could have. During the year, this year up to now, we had some optimizations and RWA reduction through some small securitization initiatives. These will continue either securitizations or synthetic securitizations. These are on our agenda. Through, as always, reviewing the collaterals, increasing collaterals to reduce RWA is very critical. We will continue. At the same time, what kind of profit we are using on these RWAs is also very critical. This is the discipline, pricing disciplines we have. RWA optimization, I look at two ways. One is creating income, the other is reducing RWA. Both are important.
Thank you.
Our next written question, "Could you please share how NIM is shaping up in Q4 so far, and where do you see the 2026 exit NIM, and what are your current macroeconomic expectations for the next year?
Go ahead, Atıl.
Okay. In the fourth quarter, the net interest margins continue to improve. Late August, Central Bank reduced the effective cost of funding from 40% to 37%. We have reflected those costs of deposit, and there is an already improvement in the third quarter. There is another cut by the Central Bank by 100 basis points. We are effectively improving our cost of deposits. Compared to the end of third quarter, I can say in Turkish lira loan and deposit spread, there is another 40 basis points or so improvement already we have achieved compared to the end of third quarter. Full year, as Ceyda mentioned at the beginning, we will be delivering our NIM guidance, or it could be even better.
There might be another part of that question was about macro. Ceyda, you want to comment?
Expectations for 2027. For the next year, we have not finalized the budget, but for the inflation, we expect it to be between 25%-30%, and for the interest rate between 30%-35%, and where it will end, it will depend on the energy prices and, of course, geopolitical developments. At least we think 4%, 5% real rate is required. This is what we can share for now.
It also depends on the regulations where, for instance, taxes, I think there was some news on tax on time deposit.
If that's reduced, then the policy rate could be set even lower for the same real interest rate. But we need to see a few more data points as well going into the next year, and especially salary increase in January because it's reflected directly in the service cost, which you can expect and which is important every 12 months. There is an increase in salaries for minimum payments that immediately affects service costs. For that reason, we need further data. It's a bit the reason we have a relatively large range from 25%-30%. We might have a better guidance in the following quarter release.
Thank you. It's a good question.
Our next written question is on funding strategy. "How do you think about your funding strategy over the next 12 months? Which segments or products look most opportunistic right now?" Thank you.
Okay. Funding strategy over the next 12 months. We continue to rely on customer deposits. Internally, we have probably more risk liquidity metrics than any other bank in Turkey, with BBVA guidance there as well. So, you know, we try to be opportunistic, but at the same time. For us, liquidity measure is very important. So, depending on the liquidity, including even gold prices, we have a lot of customers with gold with us, that defines our liquidity metrics. But as we point out in the presentation, on both side of the balance sheet, we rely heavily on customer, so that will continue as we come down in inflation as well.
Thank you. One moment for the next question. Our next written question: "Some of your competitors are pursuing IRB approach approvals. Do you also want to follow this route, and how far with preparations are you?
Yes, we are looking into it. I mean, we have some preparations, but it is a bit early to make a guidance, to provide a guidance, but we are looking into it.
Thank you. Our next written question: "Is there any data you can share regarding the success/fail rate of loan restructuring, especially in distressed times?
Yeah, I think over the last two restructuring mostly affected the credit card. Even the size of the credit card is much higher than the general loan in retail segment. We have seen pretty much close to 50% of the customers, again, in three months or four months, they have end up in the same situation. But 50% of them, because of those minimum payments and ability to pay, actually, they have the intention to pay, and when we extended the loan terms, they have been able to get out of the problem. Therefore, it's a relatively good success. I think you might see part of the increase on our cost of risk from second quarter to third quarter is related to lack of new restructuring.
The restructuring we have done in the first and second round, some of the customers, as I said, 50% couldn't come out of it after several months, and we have seen that risk in the third quarter. Otherwise, the increase from quarter to quarter is still important, but if you really look at without the restructuring impact, the cost of risk increase is less from quarter to quarter. But we are happy with the 50%, to be honest. Any further question?
Seems like we don't have any further questions, so we will conclude the Q&A session here.
Thank you for joining us today, all of you. Our third quarter results, once again, like the previous quarters, demonstrate the strength of our business model. Really, it's a business model approach and sustainability of our results through effective balance sheet management, which really rely on customer-driven growth. We continue to demonstrate profitability and reinforce our leadership in Turkish lira lending, as well as profitability, especially among private banks. We also continue to advance, as you know, on sustainable finance commitments, especially supporting Turkey's transition to a low-carbon economy. As you know, our role as a global banking partner of COP31 also demonstrates and underscore this commitment, and it's a real commitment for us. Looking ahead, our strong financial position, technological capabilities, as I mentioned in the previous quarters, we have seen some of the impact in OpEx and resilient business model.
We feel confident that we will navigate regardless of the market conditions globally or locally to create value. Atıl mentioned about how we approach every project, every OpEx. This is the approach we look at our investment in technology or any area. We will continue to do so. Economic value added is an internal KPI metric we use more than profitability, so we need to generate value for our customers as well as for our shareholders. We will continue to do so. Hopefully, next time we again come together with really good results and celebrate the end of the year. Thank you again for joining us, and have a great evening.